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Facts
The assessee, a partnership firm running a petrol pump, filed its return for AY 2017-18. The AO disallowed INR 12,20,700/- related to interest-free advances given to a partner, citing that the assessee paid interest on borrowed funds. The CIT(A) deleted the disallowance on staff advances but confirmed it for the partner's advance.
Held
The Tribunal held that the assessee had sufficient interest-free funds in the shape of partners' capital to make the interest-free advance to the partner. Following the Supreme Court judgment in Hero Cycles and Reliance Industries Ltd., it was held that since mixed funds were available, the advance could be presumed to be out of interest-free funds.
Key Issues
Whether disallowance of interest cost is justified on interest-free advances given to a partner when the assessee has mixed funds (borrowed and own capital) and sufficient own capital is available?
Sections Cited
250, 143(3), 143(2), 36(1)(iii), 234A, 234B, 234C, 234D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI “C” BENCH: NEW DELHI
Before: SHRI YOGESH KUMAR U.S & SHRI MANISH AGARWAL
Year : 2017-18] V.V. Transport, vs ACIT, 96-A, Sindhu Bhawan, Rohtak Subhash Nagar, Rohtak, Haryana-124001. PAN-AADFV5250G APPELLANT RESPONDENT Appellant by Ms. Sakshi Pandey, Adv. Respondent by Shri Om Prakash, Sr. DR Date of Hearing 15.05.2025 Date of Pronouncement 08.08.2025 ORDER
PER MANISH AGARWAL, AM :
The present appeal is filed by the assessee against the order dated 05.01.20248 passed by Ld. Commissioner of Income Tax (A)/ADDL/JCIT(A)-7, Kolkata [“Ld.CIT(A)”] in Appeal No.CIT(A), Rohtak/10584/2019-20 u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 20.12.2019 passed u/s 143(3) of the Act pertaining to assessment year 2017-18.
Brief facts of the case are that the assessee is a partnership firm, engaged in the business of running of petrol Pump. The return of income for the year under appeal was filed on 28.10.2017, declaring total income of INR 4,29,25,730/-. The case of the assessee was selected for complete scrutiny for the reasons of cash deposits during demonetization period and notice u/s 143(2) was issued on 24.09.2018. After considering the submissions and the books of accounts submitted, the AO had taken no adverse inference on the issue of cash deposited during demonetization period however, he has made disallowance of INR 12,20,700/- by holding that the assessee has made interest free advances to staff and to one of the partners whereas it is paying interest on the borrowings. In first appeal, Ld.CIT(A) has deleted the disallowance made out of the interest payments towards the staff advances given however, confirmed the disallowance on account of advances given to the partner of INR 1 crore.
Aggrieved by the said order, assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. “That the order of the Ld. Assessing Officer and Hon'ble CIT (Appeal) is against facts and is bad in law.
2. That the Ld. A.O and Hon'ble CIT (Appeal) erred in law and in fact in imposing the addition amounting Rs 12,20,700/- in provisions of section 36 (1) (iii) on wrong and untenable grounds.
3. That the Ld. A.O and Hon'ble CIT (Appeal) passed the order without considering the merits of the case.
4. That the Ld. A.O and Hon'ble CIT (Appeal) has passed the order based on the surmises and conjectures, without having any concrete evidence in hand.
5. That the Ld. Assessing Officer has erred in charging interest u/s 234A/B/C/D of The Income Tax Act on wrong and untenable grounds.
6. That the appellant craves leave to add, amend, alter or forgo any ground of appeal at the time of its hearing.”
Ground of appeal Nos.1 to 4 raised by the assessee with 4. respect to the disallowance of INR 12,20,700/- being the proportionate interest cost on the interest free advances given to the partner therefore, they are taken together for consideration.
5. Before us, Ld.AR for the assessee submits that the assessee is having sufficient capital of partners out of which the advance was given to the partner and there are mixed funds therefore, no disallowance should be made in terms of the judgement of Hon’ble Supreme Court in the case of Hero Cycles reported in [2015] 379 ITR 347 (SC). He further submits that the advance to the partners was given in preceding years however, no adverse inference was taken in preceding years when the advance was given. Ld.AR thus, submits that when the assessee firm was having sufficient capital of partners and one partner can give loan to other partners, Shri. Karampal Saharan after making the withdrawals from the firm however, the advance was given directly from the firm and since the interest free funds in the shape of partners capital was available therefore, no disallowance could be made.
6. On the other hand, Ld.Sr.DR for the Revenue vehemently supported the orders of the lower authorities and submits that the assessee has paid interest on the borrowed funds and advance was given for non-business purposes therefore, the lower authorities has rightly disallowed the interest which deserves to be upheld. He prayed accordingly.
Heard the contentions of the both the parties and perused the material available on record. From the facts and circumstances of the case, it is seen that AO has not doubted about the availability of the funds of the assessee in the shape of partners capital which is sufficient for making advance to one of the partners Shri Karampal Saharan. It is further seen that AO has failed to prove the nexus between the borrowed funds and the advance made which incidentally was not given during the year under appeal and was advanced in the preceding AYs. The Hon’ble Supreme Court in the case of CIT vs Reliance Industries Ltd. reported in 410 ITR 466 (SC) has held that where mixed funds are available, it could be presumed that the advance is given out of interest free funds. In view of the discussion made herein above and by respectfully following the judgement of Hon’ble Supreme Court (supra), we hold that the assessee has sufficient interest free funds in the shape of partners capital to make the interest free advance to one of the partners and therefore, no disallowance out of interest paid could be made in the facts and circumstances of the case. Accordingly, we hereby direct the AO to delete the disallowance made by the AO. Thus, ground of appeal Nos. 1 to 4 raised by the assessee are allowed.
Ground of appeal No.5 raised by the assessee with respect to 8. charging of interest which is consequential in nature and AO is directed to charge interest on the income computed after giving effect to the order of the Tribunal. With this direction, Ground of appeal No.5 raised by the assessee is allowed.